On February 15, 2022, the Ukrainian Parliament adopted draft Law No. 5090 on Amendments to the Budget Code of Ukraine on the Regulation of Budgetary Relations in the Implementation of Contracts Concluded within the Framework of Public-Private Partnerships, Including Concession Contracts (Law 5090). The law is vital for the functioning of public-private partnerships (PPP) in the road and highway reconstruction sector since it enables public partners to provide guarantees of fulfillment of their long-term obligations under relevant PPP projects.
Law 5090 is yet to be signed by the President of Ukraine, but there is no doubt that it will be enacted. The destruction brought on by the Russian forces during their invasion of Ukraine made it clear that rapid restoration of the infrastructure will be necessary. And PPPs will be used as one of the key instruments of Ukraine’s infrastructure reconstruction. To elaborate on the importance of Law 5090, firstly, we should identify the problem it solves.
One of the major characteristics of a PPP project is the long-term nature of the relationship between the public and private partners. Both the Ukrainian Law on Concession (Concession Law) and Law on Public-Private Partnership (PPP Law) follow this principle and state that the PPP project should be 5-50 years long. Any short-term projects are not considered PPP projects and, thus, are not regulated by the mentioned laws.
At the same time, both the Concession Law and PPP Law provide for the state support of projects, including payments made by the state to private partners, for example, availability payments. Previously, the Ukrainian Government planned to carry out six concession projects for six segments of highways, by the end of 2023, using the availability payments instead of tolls.
However, the effective Budget Code of Ukraine lacks budget instruments to provide such state support as availability payments to the long-term road PPP projects. This issue is considered a material risk by investors, especially foreign ones, who would otherwise participate in these PPP projects. Additionally, investors saw a bad example set by the green tariff crisis in the renewable energy market – when the Ukrainian Government declared that it had become too burdensome financially and initiated a discussion of a potential tariff decrease with investors.
Law 5090 solves this risk by amending the Budget Code of Ukraine and providing public partners with a right to undertake long-term obligations under PPP projects, including availability payments, for the term of the respective PPP or concession agreement. Respectively, all payments to be made by a public partner under such agreements will be funded by the special fund of the state budget annually, during the relevant project’s term.
For this purpose, Law 5090 also specifies the funding sources for road PPP projects. Notably, it limits the annual payments that should be made to private partners under state road PPP projects to 30% of the revenues earned by the special fund of the state budget – the State Road Fund of Ukraine (Road Fund). The Ukrainian Government will determine the procedure for distributing revenues of the Road Fund. At the same time, the annual payments under the municipal roads PPP projects are limited to 30% of the local budget’s revenue.
Additionally, Law 5090 expands the list of funding sources of the Road Fund by adding a toll for trucks weighing more than 12 tons using the state roads. Since the relevant draft laws No. 6087 and No. 6089 have not been voted in the first reading as of now, this new source of funding is yet to be implemented.
At the same time, state support for road PPP projects is not the only issue that impedes Ukraine from effective implementation of road PPP projects. Rapid post-war reconstruction requires the facilitation of certain procedures, including allotment, changing the designated use of land plots, and simplification of construction-related procedures. Optimizing these procedures beforehand will significantly increase the efficiency of the post-war reconstruction.
The adoption of Law 5090 is indeed a major step toward the expansion of successful PPP projects in Ukraine’s track record. However, the reconstruction may only begin after the hostilities have ceased and there is sufficient financing to cover the expenses. After that, we believe that Ukraine will welcome all investors willing to participate in the restoration of the infrastructure under the PPP framework.
By Maksym Maksymenko, Partner, and Rostyslav Mushka, Associate, Avellum